High Taxes vs. Yield

June 17, 1957

Our steeply “progressive” personal income taxes, as students of the subject have long recognized, undermine incentives and slow down the capital formation upon which our economic progress in the long run depends. But as a new 40-page study by the Tax Foundation proves in detail, these confiscatory rates do not even achieve their ostensible purpose of raising revenue.

If a flat rate of 20 percent (now applying only to the lowest taxable income bracket) were applied, for example, to all taxable income, 85 percent of the revenue at 1955 rates would still be obtained. This rate produced $25.5 billion of the revenue from the personal income tax in 1955. All the “progressive” rates together produced only $4.4 billion more.

Our extravagant Federal expenditures are in large part the result of the belief that “the rich” are paying them. This belief is a delusion. If the present rate structure were cut off at a maximum of 50 percent, 98 percent of the revenue at 1955 rates would still be obtained. (The loss in revenue would be only $734 million.) If the present rate structure were cut off at a maximum of 70 percent, 99.5 percent of the revenue at 1955 rates would still be obtained. (The loss would be only $145 million.)

RATES VS. REVENUES

But even these relatively small losses are calculated on the assumption that income in the higher tax brackets would not change. Yet the Tax Foundation’s study provides a very heavy presumption that if the top rates were reduced as indicated, the incomes they affected would not only increase relatively to other incomes as a result of the incentives (or reduced deterrents) provided by the tax cut, but would increase enough actually to increase government revenues from these incomes.

Time and again, when the highest rates were reduced, relative revenues from the high-income brackets rose. During the 1920s the greatest reduction in surtax rates was at the top of the income scale (from 65 percent to 20 percent). Despite this reduction, the share of the total income tax paid by the high-income classes more than doubled—from 30 percent in 1920 to 65 percent in 1929.

The contrast is even more striking when we look at the steady long-term fall in the percentage of the total tax revenues collected from the higher incomes as the rate on those incomes was increased. Despite a huge increase in total personal incomes, we find that in the highest incomes (those of more than $100,000) there has been no long-term upward trend in total income reported. In fact, average reported income per tax return above $100,000 is actually less in recent years than in 1916!

THE $100,000 INCOMES

As neither official national income figures nor price indexes are now generally carried back beyond 1929, I take that year as our base of comparison. The national income increased from $87.8 billion in 1929 to $302.1 in 1953—a rise of 244 percent. The top surtax rates on incomes over $100,000 were increased from 20 percent in 1929 to 74 to 89 percent in 1953. And the total income of those who filed income-tax returns over $100,000 fell from $4.4 billion in 1929 to $2.9 billion in 1953, a decline of 33 percent.

Even this does not show the real contrast. For in 1953 wholesale prices had risen to an index of 110.1 as compared with 61.9 in 1929. This means that the incomes of $100,000 and over in 1953 should in strictness be compared (in real purchasing power) with incomes of $56,222 and over in 1929. As the Tax Foundation study does not make full allowance for all these factors, its conclusions actually understate its case.

The effect of high taxes on incentives to work and invest has been obscured, it is true, by nearly three decades of depression, war, and inflation. But it is enormously probable that cutting off the top progressive rates at a maximum of 50 percent (instead of the present merely punitive 91 percent) would lead to an actual increase in governmental revenues. If Congress can set aside all catering to prejudice and envy, and courageously take this step, it will achieve a major tax reform without endangering a balanced budget.